Hello, and welcome to the RingCentral Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please limit yourself to one question. Please note, this event is being recorded. At this time, I would like to turn the conference over to Will Wong, VP of Investor Relations. Please, go ahead.

Thank you. Good afternoon, and welcome to RingCentral's second quarter 2022 earnings conference call. I'm Will Wong, RingCentral's Vice President of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO: Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Mo and Sonalee, followed by Q&A. We also have a slide presentation available on our Investor Relations website that will coincide with today's call, which you can find under the Financial Results section at ir.ringcentral.com. Some of our discussions and responses to your questions will contain forward-looking statements, including our third quarter and full year 2022 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings release and in the slide deck. Please visit our Investor Relations website to access our earnings release, slide deck, our GAAP to non-GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. With that, I'll turn the call over to Vlad.

Thanks, Will. Good afternoon, everyone, and thank you for joining our second quarter earnings conference call. While we are not immune from the current macro environment, we delivered a strong Q2. Let me start by giving you five contexts. One, we are a $2 billion ARR company; two, contact center is now over $0.25 billion of ARR and is a key growth driver for us; three, we are now at more than 5 million paid seats in our base; fourth, we matched our quarterly record of $1 million, plus TCV deals, bringing the total to almost 500; and five, we delivered a record operating margin in the quarter of 11.3%, up 110 basis points year-over-year. These results demonstrate RingCentral's leadership position in UCaaS, driven by our product innovations and unique go-to-market strategies. We have been able to achieve these milestones through consistent execution. Q2 was no exception. Sonalee, who I'd like to welcome to her first earnings call as RingCentral's CFO, will share with you more details about our financial results shortly. Let me first give you the highlights. Subscription revenue grew 32% year-over-year and 33% on a constant currency basis. Total revenue grew 28% year-over-year, and 30% on a constant currency basis. Both were above the high end of our guidance even taking into account the stronger dollar. Operating margins of 11.3% were a quarterly record and well above our guidance, with free cash flow margins expanding 220 basis points year-over-year to 6%. Following solid margin expansion in Q1, these results give us confidence in our ability to deliver sustainable growth while expanding our margins. Our success to date is grounded in four global megatrends. These are: one, the cementing of hybrid work in the post-COVID era, which in turn reinforces the need for cloud-based communications platforms; two, the…

Thanks Vlad. Q2 was a strong quarter with strength from our direct business and our partners. We won close to 50 deals with a TCV of over $1 million. Our integrated market-leading UCaaS and CCaaS offering also performed very well with continued increase in the attach of CC on UC for our upmarket teams and we were able to achieve these results while driving revenue and operating margin growth. In short, we executed well. Now, let me give you some examples of how we benefited from the four megatrends that Vlad outlined. First, hybrid work. Companies are enabling their people to work from anywhere and RingCentral helps them be productive wherever they are. As an example, C&S Wholesale Grocers, a US industry leader in supply chain solutions and wholesale grocery supply, recently selected RingCentral to replace their legacy PBX infrastructure. Here's what C&S had to say. "As we research cloud solutions to replace our PBX infrastructure, we saw that with RingCentral, we could integrate a whole suite of communication features in one platform, connect our dozens of offices across the country for the first time ever, empower our employees to communicate from anywhere and still save $1 million a year." Second, mobility. One of the largest real estate brokerages in the United States needed a solution that seamlessly allowed their offices to back each other up and securely wrap calls to their thousands of agents, whether in the office, at home or in the field. And beyond creating a truly mobility-centric solution, the brokerage was able to recognize meaningful ROI by selecting RingCentral with $2 million of savings over five years via a transparent and predictable cost structure. As a bonus, this also freed up their IT teams to focus on other key initiatives. Third, Microsoft Teams, which continues to…

Thanks, Mo. It's a pleasure to be here on my first earnings call as RingCentral's CFO. I've met some of you since I joined in May and look forward to spending time with more of you in the coming weeks and months. I chose to join RingCentral, because I saw a compelling opportunity to join a category leader in a high-growth space, operating at scale. Importantly, RingCentral is one of the few high-growth SaaS companies with a $2 billion revenue run rate, expanding operating margins and free cash flow. My first few weeks have reinforced my belief that RingCentral is still in the early innings of a tremendous market opportunity, and I look forward to sharing our progress with you in future quarters. As RingCentral's CFO, my top priority will be driving efficient growth. This includes expanding operating margin and free cash flow, while investing in and driving our future growth. I will be firmly focused on creating value for our key stakeholders, which include our customers, our employees and our shareholders. With that, let me turn to our Q2 highlights. Q2 was a strong quarter. All key metrics came in above the high-end of our guidance, and we delivered a record operating profit margin. Subscription revenue rose 32% year-over-year to $463 million, above the high-end of our guidance range of 28% to 29%. Adjusted for constant currency, which represented a roughly 1.5 point impact, subscription revenue rose over 33%. As we highlighted last quarter, balancing growth and profitability is one of our core tenets. I am particularly pleased with the improvement in our non-GAAP operating margin of 11.3%, which was meaningfully above our previous outlook of 10.4%. This was up 110 basis points year-over-year and continued the expansion we delivered last quarter. Additionally, we ended the quarter with $306…

Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question today comes from Kash Rangan of Goldman Sachs. Please go ahead.

Hi. Thank you very much. Nice improvement in operating metrics and good to see the Team's channel be prolific for you guys. I have two questions. One, you were very upfront about the macro environment and that you saw some level of caution. How do you think about the second half of the year? What are you incorporating with respect to macro assumptions? Is it smaller deal sizes or close rates, et cetera? I did ask that, because in Q4 for you -- for RingCentral, is generally a nice pick up in ARR bookings. So, we should be still we expecting that sort of seasonality? And one for Sonalee, congratulations and welcome to being CFO of RingCentral. You talked about how you'd be looking for operating efficiencies while not compromising growth. What are the things that you've identified in the business model that should be sources of operating leverage in the future as you target the 20% growth? Thank you so much.

Thanks, Kash, for the question and also for your very kind remarks. I'm extremely, extremely excited to be here at RingCentral and to be partnering with this great team, this amazing leadership team. So I really do appreciate those comments. Maybe what I'll do is start with your second question, just around how we manage or how we're intending to manage balancing both growth and our drive towards greater and stronger profitability. And what I would say is you can look at this quarter as a great example, because we managed to deliver pretty exceptional subscription growth and total revenue growth, whilst also expanding our OP margins significantly. It was a record quarter, as you know, 11.3% of OP margin. And we really managed to do this by being quite deliberate in terms of running the business efficiently. And we specifically looked at areas such as sales and marketing, and also R&D as well as efficiencies around higher and vendor consolidation. And taken together, we were actually able to drive that OP margin efficiency whilst also delivering great revenue growth. And if you think about where we're guiding for the full year and the fact that we've raised our OP margin guidance again, second quarter in a row, and if you think about the guide and the minimum OP margin aspiration that we put out there, what you can see is there's a lot more goodness to come there. And we will be evaluating all aspects of the business. But what I can tell you is just being a couple of weeks -- or my second month into the job, I see opportunities in all three of these categories, so further opportunities to drive sales and marketing efficiency, R&D efficiency and D&A. And the other thing I would just add…

Very comprehensive answer. Move on to next question.

Next question, please. Operator.

Our next question is from Terry Tillman of Truist Securities. Please go ahead.

Yes, thank you for taking my question. It's one question, but two parts. Sonalee also welcome to RingCentral. Congrats. And also, thanks for the color on the ARR, the exit subscription revenue ARR, that's very helpful. The two-part question. The first part is for Mo. I'm just trying to reconcile, it sounded though you still have pretty good productivity, though, $50 million or so or near $50 million-plus TCV deals. So I'd love to just understand some more color in terms of they clearly are starting a little bit smaller? Is it less contact center seats, or is it maybe half the size of the deployments? And then the second part of this question, though is, for you Sonalee, is people do look at that exit subscription revenue ARR because it has implications into the next kind of 12 or 15 months. should we see it kind of ramp up though as we exit the year even with these puts and takes because of all the growth initiatives and channel partners? Thank you.

Okay, Terry. So let me take the first half of that question. And I think the punchline is, I articulated, leads were up in the quarter, both quarter-over-quarter and year-over-year. And as we discussed, what we are seeing is a degree of cautiousness in terms of our larger customers, generally going with smaller initial deployments. You made a comment around contact center. I'll tell you that our attach rate of contact centers continuing to go up. So that certainly is not a factor in play. It's really just about I think the buyers are looking at any potential impact on their own business, what's happening with their own budgets, testing the technology, if you will, of deploying in smaller ways, seeing the value creation that we spend a lot of time talking about with our various customer examples and then bringing it to life. Okay. And Sonalee, do you want to take the second half?

Sure. So firstly, Terry, thanks for your kind wishes as well. So, with respect to ARR, as you know, we don't specifically guide to ARR. I am really proud of what we achieved in the quarter, 31% growth in the second quarter. We did have obviously an impact from FX and that obviously is a negative impact for this quarter. But we will continue to add healthy bookings and feel really confident in the way that we guided for both Q3 and the full year. So, hopefully, that answers your question.

Operator, next question.

Our next question comes from George Sutton of Craig-Hallum. Please go ahead.

Thank you. Sonalee, my great wishes as well, congratulations. So I'm curious, as a user of stock compensation with the stock decline, how are you using it perhaps differently today relative to retention and/or new hires?

Hey, George, I hope you're doing well. This is Mo. Look, we've guided that we expect to bring stock-based comp down year-over-year this year by a couple of hundred basis points. We're well on our path to achieving that, potentially even exceeding it by the end of the year. And what we're finding is frankly that our team and our talent is embracing the strategy. They're fully engaged on being part of this team. We're utilizing SBC where it's required. Obviously, we think about our employee base, superstar talent, key contributors, et cetera. And as we bring that together, we're finding that we're able to find that balance of compensating appropriately, healthily while at the same time, ensuring that we're bringing down the comp as a percentage of revenue year-over-year. And frankly, I expect that we're going to continue to drive discipline in this space and improve over time.

Our next question is from Meta Marshall from Morgan Stanley. Please go ahead.

Great. Thanks so much and congrats on the quarter. Maybe Vlad or Mo, just as you gave the disclosure on how big the contact center business had become kind of being over 10% of ARR, does that change how you guys think about partnering versus developing organically or just other feature sets that you would think on adding in addition to kind of contact center to expand the ARR of your customers or the ARPU of your customers? Thanks.

Yes. Hi, Meta. Yes, look here. Look, contact center is very important, obviously. And as we stated and reiterated, we are still in the unique position of being able to provide market-leading MQ leading UCaaS and CCaaS on the same paper and on the same network. So that is just a unique differentiator, not existing elsewhere. Now clearly, customers are liking it. Historically, people have been buying from -- in the on-prem days, people have been buying UC and CC largely from the same vendor led by Avaya and Cisco historically. And we are now seeing similar behaviors repeat themselves in the software -- in the cloud software as a service world. Okay. Now so top line growth is wonderful. Now clearly, it'd be nice to be able to own the whole stack, but it's a very, very heavy lift. So the strategy that we have seems to be working, and we think will continue working, whereby for those customers who require best of the best in UCaaS and CCaaS, our approach is unique and industry-leading. For those customers with lesser requirements and, in particular, for smaller contact centers, we do, as a matter of fact, have our own product called RingCentral Engage. We have something called RingCentral Engage Omni, which has everything, but -- sorry, RingCentral Engage Digital, which has every channel voice. And we also have something called RingCentral Engage Omni, which is a full-up integrated solution. It does not have every bell and whistle that, for example, inContact has as well as other industry leaders. But it is an up-and-coming product, and we expect that you'll be hearing more about it.

Our next question is from Samad Samana of Jefferies. Please, go ahead.

Hi. Good afternoon. Just a couple of questions. I guess, first, just I wanted to ask on the expense side. Obviously, it's been great to see margins really inflect here. Can you remind us Sonalee maybe how much of the OpEx is in USD versus in other currencies?

Hi, Samad, it's Sonalee here. I'll take that question. So OpEx is obviously a bit of a natural hedge to our revenues, but it's a much smaller proportion of overall and it would mostly be euro based. So it's about 5% that's outside of the US in the OpEx number.

The next question is from Peter Levine of Evercore. Please, go ahead.

Great. Thanks for taking my questions. Sonalee, welcome to the team. As we continue to hear more buyers wanting to bundle collaboration, video and chat with voice in a bigger way, maybe Vlad, in your view, like, how would you debunk those saying that video collaboration suite kind of take priority over voice? And then maybe second, what are you doing today to evaluate -- to elevate, sorry, the RCV brand or the investments on the collaboration side to kind of better compete against some of the larger players in the space?

Yes. They're both important. B2B, especially within in the org, yes, many interactions -- not all, but many interactions are now over video or over internal conferencing, Microsoft Teams is pretty good at that. C2B, consumer interactions, consumer to business are still largely over voice and there doesn't seem to be any slowing down of that trend. People tend to call businesses, they tend to call their providers by voice from phones and multi cellphones. So, I think, as we mentioned, we have -- we run a survey and vast majority of people, and these are our business customers and as well as other businesses called, not our customers, are saying that they believe voice will be important to extremely important, both for customer engagement as well as for margin expansion, okay, and their revenue. So this is voice is here to stay – to state the obvious, this call we're having now is via voice, okay? So that's how we would debunk it. It continues to be a tremendous market. As I stated in prepared remarks, and this is not the first time, probably not the last time I'll say that, mobility, wireless, 5G, they're all tailwinds for us, they're friends and foes okay? And we continue redoubling our efforts in maintaining our leadership in this very, very warm means by which people communicate. People communicate in words, not just by science.

The next question is from Ryan McWilliams of Barclays. Please go ahead.

Thanks for taking the question. Just on the strategic partnerships in which RingCentral has made a significant investment. Should those strategic partners enter financial difficulties or were acquired, would you anticipate any changes to those relationships? A – Vlad Shmunis: I will take that [ph] Vlad, here. Look, we have an absolutely unique GTM approach and the partner network. There is simply not another player of, I think, any size there that can both these close relationships with a number of leading GSPs as well as majority -- or people responsible for majority of on-prem PBX, okay? Now this is turbulent times. And obviously, some people are experiencing difficulties. And I assume the question behind your question is what about Avaya. So let me just address that. Avaya has been a contributor. They have been a partner and a strong partner. They are also representative of the world's largest installed on-prem base which means what? It means that we always want more. We want it more, we want more and we will continue more. But they are, again, somebody that's been contributing to our success. We expect them to continue doing that. We expect that they understand that RingCentral continues to be both a growth driver for them as well as the profit margin driver for them. They have a new CEO that they've announced a few days ago. It's a person we know extremely well. I have a good personal the relationship with Alan. And we think that this, frankly, could be reinvigorating the relationship with very positive outcomes for both companies and very importantly for the customers, because remember, their customers still need to grow to get to the cloud, RingCentral and Avaya Cloud Office data center still continues to be the only through UCaaS mobile tenants global high-availability solution that is able to accept incoming Avaya's on-prem customers by leveraging -- with leveraging their multi-year investments into endpoints and other points of integration. We're simply in a unique position to do that, and we expect that new management will appreciate that fact.

The next question comes from Will Power from Baird. Please go ahead.

Okay, great. Yeah, thanks for taking the question. Just a question on enterprise ARR. We've seen, I guess, a deceleration in a couple of quarters in a row. And it sounds like FX is certainly a piece of that. But I guess I'm wondering how much of the slower growth there is macro? How much have you already seen on the macro side versus any other factors versus what -- how much more of the macro that you referenced in terms of smaller deal sizes or slower deployments among your bigger customers are still on the come? I guess, I'm trying to figure how much that macro is already impacting that ARR versus maybe expectations for Q3 and Q4?

Thanks. This is Mo. I'll take that one. I think the net here is two key factors. The first one is FX was a headwind. Sonalee talked about that one. And then the other one is what I brought up, which was called the three key trends that we saw in the quarter. Sales cycle times reverting the pre-COVID norms. Leads were up both quarter-over-quarter, year-over-year. And then the third one, while opportunity size for SMB remain very consistent, we did see some degree of cautiousness from larger customers and their buying decisions. At the end of the day, I mean, I think I put all those things together, the lead growth continues to demonstrate to me the opportunity ahead is real, that we can create value for our customers, frankly, and especially so larger ones that have legacy telecom hardware, IT support costs, where the value creation that we can bring for them is actually a help when you're in these sorts of times.

The next question comes from Matt Niknam of Deutsche Bank. Please go ahead.

Hey guys, thank you for taking the question. Just a quick simple one. Just on churn. Any changes you're seeing? And how is this trending across SMB, mid-market and enterprise? Thanks.

It's Mo, I'll take that one. We saw sequential improvement in churn, both quarter-over-quarter and year-over-year, and that was generally true across all of our key segments.

The next question is from Michael Turrin of Wells Fargo. Please go ahead.

Hey guys, This is Austin Williams [ph] on for Michael Turrin. I just wanted to ask about premium SKU adoption as you push further up market? And is that potentially offsetting any volume-related discounts at those larger customers? And just as a follow-up to that, is -- our pricing dynamics in UCaaS more broadly, have you seen any change competitively that might be impacting the lower price SKUs? Thank you.

This is Mo. I'll jump on that one. So just to reiterate, our overall ARPUs were resilient. They were stable quarter-over-quarter, year-over-year. They remain north of 30. New customer acquisition ARPU, which really goes to the second part of your question, also remains steady and over 30%. To your point, we're a multi-product company. As we think about ARPUs, we're looking across both our SKU base as well as the products that we're offering. And as we go further and further upmarket, we do see our customers buying more premium SKUs. As I mentioned a little bit ago, we're seeing continued increase in the attach rate of our contact center. And all of those become factors in the dynamic that drives the strong and healthy ARPUs. Look, I think the heart of this is, we're creating value by bringing together messaging, video and phone as well as the ability to integrate market leading UCaaS solution, and this is a competitive advantage that we expect to retain.

The next question comes from Taylor McGinnis from UBS. Please go ahead.

Yes. Hi. Thanks so much for taking my question. So I know that FX is a little bit of at play here. So I know it's tough to parse out. But Sonalee, if you look at the difference between ARR last quarter, I guess, subscription revenue in 2Q, it seems that some of the net new business would have been late in the quarter. So can you comment on linearity or what you might have seen there? And then, I guess, as we look ahead into the guide, just to be clear, are you assuming a similar environment that you're seeing today in the guide, or are you assuming that things deteriorate imports or get worse?

Sure, Taylor. Thanks for the question. So firstly on FX, you're absolutely right. FX was a factor in Q1 and as well as in Q2. And what I would say is that the impact to bookings in Q2 was more exaggerated just given the dislocation of the dollar. And in terms of what the guide is currently contemplating, what I said in my prepared remarks is that it's reflective of what we're seeing in the market today, including the trends that we've called out and also embedded within that, the guidance includes an additional one point to two points of headwind on growth from a stronger dollar, and that's for the full year 2022. So just to recap, Q1 had an impact. The Q2 impact was stronger. And the full year, we're seeing -- calling out an impact of between one point and two points. And the other thing I would just say is in spite of that impact from the dollar in Q2 we still had $100 million -- or over $100 million booking quarter if you adjust for currency.

The next question is from Matt VanVliet of BTIG. Please go ahead.

Yes. Hi. Thanks for taking my question. I guess, as you look at the expansion of the Vodafone Germany deal that you announced recently in light of all of the strategic partnerships. Do you feel like you're getting to market a little faster? Is the initial reception stronger? How are you feeling as you continue to expand, sort of, the breadth of those relationships and even the depth within each of those partnerships? And how that's encouraging you to go out and seek other partnerships going forward? Thanks.

Thanks, Matt. So as you think about our global service provider community, we're continuing to see consistent revenue and seat growth. And I think the heart of your question and the way I'd answer it is, each of these relationships is allowing us to unlock new sales addressable markets and frankly, unlocking new markets for the foreseeable future. I expect the new revenue-producing GSPs will continue to grow both this year, as well as in 2023, and many of them internationally.

The next question is from Michael Funk of Bank of America. Please go ahead.

Yeah. Thank you for the questions. One for Mo, if I could. Mo, given your unique experience coming from AT&T and your first point about the point success for RingCentral part of that being the transition from PBX. Just wondering if you could comment on your TBV reported weaker business revenue this quarter, I think part of that probably is that transition that we’re seeking from legacy next-generation technology. So from your perspective and your history, do you think we're seeing acceleration in that transition? Is that what we're seeing in the Verizon results? Obviously, a lot in there, but I'd love to hear you unpack that a bit.

Well, I appreciate the question. I certainly can't comment on any other company's results and subtending drivers, if you will. What I will tell you is that, I do fundamentally believe and it's a core part of why I came to RingCentral that UCaaS and the transition of legacy UC on-prem seats as well as legacy CC seats to use CCaaS is something that is going to last for many years to come. Businesses are not all ready to move to the cloud in any one given year. Frankly, as you look at the current macro environment, I think that that's going to be a factor that plays in. We've called it out several times throughout this conversation. But what I am comfortable and confident in is that the TAM is extremely large and that you're going to see consistent growth for many, many years to come.

The next question is from Matt Stotler of William Blair. Please go ahead.

Hey, team. Thank you for taking the question. Maybe just wanted to dig in on Microsoft Teams specifically, obviously, you guys are still seeing some notable success in the market alongside Teams. Any additional color you can provide, whether it's in terms of the portion of the installed base that either connected Teams or assist with Teams? Any kind of updated color on how to think about ARPU and Teams environments here? And then any thoughts on additional opportunities for collaboration with Microsoft as you think about go-to-market and further integration going forward?

Very good. So let me -- I'll address that slightly out of order. On the ARPU side, I'll tell you that our Teams' ARPU is consistent with our overall ARPU and quite strong. Our Teams' customers tend to skew up market and be larger and thus, they fall into the category of more premium SKUs and more likely to attach contact center. By the way, it's one of the key reasons along with 5 9's reliability, feature functionality, geographic reach that we're winning with that base. And then I'd just reiterate a couple of points, which is we saw meaningful growth year-over-year. Second quarter was the single largest individual quarter of growth that we've seen with our MS Teams practice. And frankly, it's exciting for us. As we see them growing in the market, we're seeing success for ourselves as well. And then I can't comment on any potential future opportunities and how we're thinking about that. I will tell you, we're going to continue to execute on our own strategy, and it is one of the four megatrends and growth drivers for the company.

Great. Thank you.

This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.